Temenos AG

SIX:TEMN

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, welcome to the Temenos Q1 2024 Results Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Adam Snyder, Head of Investor Relations. Please go ahead, sir.

[Adam Snyder, executive]

Thank you very much, everyone, for joining us today. Before we go through the results materials, I would first like to hand over to our non-Executive Chairman of the Board, Thibault de Tersant to make some opening remarks regarding this evening's announcement. Over to you, Thibault.

[Thibault de Tersant, executive]

Thank you, Adam, and thank you all for joining our results call today. I would like to say just a few brief words regarding this evening's announcement. On behalf of the Temenos Board, I am delighted to announce that Jean-Pierre Brulard will join Temenos from the 1st of May as our new CEO. Jean-Pierre is a highly experienced executive and a proven leader of large, global and high-growth organizations with a world-class track record in leading global sales organizations.

He spent the last 14 years at VMware, where he was Executive Vice President Worldwide Sales and a member of the Executive Committee and he successfully oversold the migration of VMware's business model to subscription and SaaS, while delivering strong ARR and revenue growth. Jean-Pierre brings to Temenos excellent strategic planning expertise and a strong understanding of the SaaS transformation requirements of our clients, having worked with some of the world's largest banks in his previous role.

This combination of strategic insight and energy and intrusion for working collaboratively with his colleagues to deliver for all the stakeholders across clients, partners and shareholders will be key to driving Temenos in its next stage of growth.

I look forward to him starting formally next week and to you all meeting Jean-Pierre in the near future.

I would also like to take this opportunity to warmly thank Andreas for taking the CEO role during the extended search period. His commitment, his passion and determination have been absolutely critical in building Temenos into a global leader in banking software. With independent report published last week and the appointment of our new CEO, my fellow Board members and I are looking forward to focusing again on the business and supporting our executive team in delivering on Temenos strong growth potential.

I will be on staying on the call and available to take questions at the end. And with that, I would now like to hand over the call to Andreas to talk you through the quarterly results. Andreas?

[Andreas Andreades, executive]

Thank you, Thibault. Good afternoon, and welcome to our Q1 '24 results call. I'd like first to talk through our performance and some of the highlights from the quarter before handing over to Takis to run through the financials and the outlook.

Q1 was clearly a tough sales quarter for Temenos. We saw temporary lengthening of the sales cycle due to the short-seller allegations. Some of our clients and prospects spend time considering the allegations, which added complexity to the sales cycle and some waited for the publication of the Temenos independent report before resuming engagements. The sales organization clearly have our work to do in order to move sales campaigns forward. However, despite these challenges, there are some really important positives in the quarter.

We have been working relentlessly to transition to a recurring revenue business model as you are aware, establishing ARR as our key performance indicator across the business, SaaS and on-premise. And in particular, as I explained during our Q4 and Capital Markets Day, ARR is now fully operationalized and sales targets for 2024 are based on ARR. And this transition has helped reduce the volatility in our business as shown by the Q1 results.

Despite total software licensing declining, our ARR still grew 12% in Q1. Our sales force is highly focused on recurring revenue deals. We are seeing the benefit of value uplift on renewals. We have the positive impact of CPI linkages in our recurring contracts and we had a particularly strong maintenance growth of 10% this quarter, which drove ARR as well as profits and cash flows, of course.

On top of this, our sales revenue continued to grow double digits, driven by the ACV signings last year, our total revenue still grew and we had a strong profitability and cash flow quarter. All in all, I believe that the investment we made with the shift to a recurring revenue model is starting to show for our numbers. Perhaps most importantly for me, our pipeline continued to grow in Q1. Now that the independent examination report has been published, we are seeing positive responses from clients with some delayed deals already signing and others moving forward again in the sales process.

From a regional perspective, APAC and Europe still grew year-on-year with the Americas flat and Middle East and Africa declining, especially also given the strong comparative which was expected. Subscription revenue continued to grow as a percentage of the license mix, and we had a healthy 9 new client wins in the quarter.

Now on a personal note, this will be my last quarterly results call after 25 years with Temenos. It's been an absolute owner to work and lead this business. I would like to thank all of my colleagues, all our clients, our partners and shareholders who have supported us over this time. I wish our new CEO every success for the future, and I'm confident Temenos will go from strength to strength. With that, I'd like to hand over to Takis.

[Panagiotis Spiliopoulos, executive]

Thank you, Andreas, and also welcome from my side. Starting with Slide 12, I'll give an overview of the quarter. All figures are non-IFRS and in constant currency unless otherwise stated.

As Andreas highlighted, we had good growth in ARR-based quarter, up 12% to reach $723 million by quarter end. The sequential decline of 1% versus Q4 '23 is mainly linked to the weak SaaS ACV and subscription signings combined with the timing of some downsell and churn in the quarter. I, therefore, remain comfortable with our guidance of around 15% ARR growth for the full year.

The continued growth in ARR this quarter was supported by $20 million of subscription signings and $5 million of South ACV, although these were both relatively weak compared to our original forecast due to the temporary lengthening of the sales cycles, as Andreas mentioned. Overall, total software licensing was down 8%. However, maintenance growth of 10% was a clear highlight driven by value uplift on renewals, CPI escalators in our contracts and continued good momentum from premium maintenance. Total revenue grew 2% in the quarter with a transition to recurring revenue, mitigating the volatility of the license revenues. Revenue was up 7%, and our EBIT margin expanded 190 basis points in the quarter.

Our cash flow remains solid and with good cash collection, our free cash flow was up 26%. Our DSOs reduced to 136 days in Q1 '24, down 5 days from Q4 '23. Following the usual seasonal pattern as we collect cash for deals signed late in Q4 and also helped by a reduction in services DSOs. We expect DSOs in 2024 to trend down as we have reached the peak of the subscription transition impact. We also continued to delever through the quarter and again 1.4x leverage down from 1.6x at the end of 2023, which is below our target range of 1.5 to 2x and which gives us tactical and strategic flexibility.

Moving to Slide 13. I think the highlight for the quarter really was a strong growth in sales revenue, up 19% on the back of ACV signed last year and the strong maintenance growth as well as the resilience of our total revenue growth in the face of temporary sales challenges. Operating costs were down 1% in the quarter, driven by lower G&A costs, lower services costs, as well as lower variable costs, such as commissions and travel more directly linked to lower signings. We continued our focused investments in cloud and in key hirings across our R&D and also sales and marketing. As an example, sales and marketing costs were 7% in the quarter. Lastly, we delivered $73 million of EBIT in the quarter.

Next on Slide 14, we have like-for-like revenues and costs, adjusting for the impact of M&A and FX. The figures are all organic and therefore, in line with our constant currency growth rates. Looking in particular, at our cost base, our services costs were down 3% as forecast. Product related costs in the quarter were flat as we continued our focused investments in cloud and in key hirings across both our R&D and sales and marketing. Looking at FX, the stronger pound sterling was a slight headwind on costs, but more than offset by a weaker Indian rupee. Overall, there was a $1 million positive impact from FX on EBIT.

On Slide 15, net profit was up 7% in the quarter, slightly lower than EBIT growth with higher tax charges offsetting lower financing costs and the impact from FX. Net EPS for the quarter was up 6%.

On Slide 16, our LTM cash conversion was at 118%, above our target of converting at least 100% of IFRS EBITDA into operating cash and we continue to expect our cash conversion to be at least 100% going forward.

Moving to Slide 17. We have the key changes to the group liquidity in the quarter. We generated operating cash of $72 million and also drew down on our RCF with a bond due for refinancing earlier in April. We ended the quarter with $302 million of cash on balance sheet and net borrowings of $568 million. Our leverage is at 1.4, and I expect this to continue declining, assuming no M&A.

On Slide 18, we have confirmed our 2024 guidance, which is non-IFRS and in constant currency. We are guiding for ARR growth of about 15% as we continue to benefit from growth in subscription, sales revenues and the growth acceleration in maintenance. We expect total software licensing to grow 7% to 10% and EBIT to grow 7% to 9%, reflecting the investments we plan to make this year. We are guiding for EPS to grow 6% to 8% with our tax rate expected to be between 20% and 22%. Lastly, we expect our free cash flow to grow at least 16%. We have put the EBIT and free cash flow bridges into the appendix for your reference.

On Slide 19, we have confirmed our midterm targets, which are to reach ARR of at least $1.3 billion, EBIT of at least $570 million and free cash flow of at least $700 million in the next 3 to 5 years.

And for conclusion on Slide 21, despite the sales challenges in this quarter, where resilience of our business model was clearly demonstrated with strong ARR growth and reduce quarterly volatility with the shift to our recurring revenue model, both at the revenue and profit level. I was pleased that the pipeline continued to grow and we expect the publication of the independent examiner report on the allegations to restore normal deal closure rates. We expect the sales environment to remain stable for the year and have confirmed our 2024 guidance.

Finally, on a personal note, I'd like to thank Andreas for this significant contribution to the success of Temenos and for supporting the leadership team. I have appreciated your guidance, insights and ideas over the years.

With that, operator, I'd like to open the call to questions.

[Operator]

[Operator Instructions]. Our first question comes from Frederic Boulan from Bank of America.

[Frederic Boulan, analyst]

You mentioned the findings were impacted by temporary delays on [ onshore ] allegations. So I know the results of the review is -- but can you maybe share with us how discussions are shaping up? How should we think about the subscription trajectory in the coming quarters? And more broadly, simply expect a pretty stable demand environment, but we are still in the backdrop of fairly full demand on the IT spending on the banking side. So it'd great to have a little bit your assumptions from the demand side on the spending? And then in particular, how we should think about subscription growth going forward?

[Panagiotis Spiliopoulos, executive]

Okay. Let me take this one, Fred. I think on the IT spending environment, we have not seen any changes in terms of the first 4 months, as we have mentioned in the -- also in the February call, and it's actually the same as last year where we ended. There is still strong propensity from clients to do -- to go forward with IT renovation projects. So that hasn't really changed at all. Cloud is still top of mind, i.e., how quickly and how can we help clients shifting workloads on core banking workloads for the cloud. And this is either going to be one of the two deployment models, as we have mentioned in the past, either they buy subscription and run it themselves or they take up ourselves offering.

And this is something we always expect to remain, yes. And it's something we see across our tiers. The -- if you want IT investment budget for core renovations for core modernization as we have seen over the last couple of months definitely have developed positively. And this despite, there is still some macro uncertainty out there. In terms of macro backdrop of macro assumption, I think we're in line with consensus either calling for a soft landing or no landing at all. I think this is what we can say.

The impact from the allegations clearly was, as Andreas mentioned, some clients for their own basically internal compliance reasons, they needed to wait for the report to be published. We talk here about regulated entities, which run our software. So it's definitely added to the complexity. And clearly, is now for the last 7 or 8 days, those discussions have resumed. We even saw some deals which were basically suspended on the back of this. So we would expect this to eventually that we can catch up on what we missed out in Q1. This is also the reason, given the visibility we have, that we have to reconfirm the 2024 guidance across all items. Did I get everything? Did I miss anyone?

[Frederic Boulan, analyst]

Yes. I mean I think you did. I mean, I don't know if you can be a bit more specific on the subscription side, which was a fairly big sort down sequentially. So I think you answered in terms of catching up in Q2 and beyond.

[Panagiotis Spiliopoulos, executive]

Yes. I think it's a better comparison to -- with the previous year. Clearly, there is always a substantial slowdown or if you want a decline from any Q4 to Q1 and Q4 was accounting for 40%, 45% of the full year and Q1 being by far smallest quarter. If you look at the delta versus consensus, which is probably more in the $10 million to $15 million range. I think this is something we are comfortable to catch up in the remainder of the year.

Yes, and clearly, we saw the strongest impact on subscription as by now, we have very few term license dates remaining in the pipeline, yes. So I think on Q2, you would already expect a much, much more pronounced seasonality than you would see in a normal Q1 versus Q2. So that's on an H1 basis, we're still confident.

[Operator]

The next question comes from Charles Brennan from Jefferies.

[Charles Brennan, analyst]

Just a couple for me. Sorry, I missed the phasing in your last response. You're obviously assuming you're going to catch up the missed $15 million in the remainder of the year. Do we assume that all comes in Q2? Or do you think it comes evenly phased through the rest of the 3 quarters? And then just on costs. We don't often see software companies able to linearly reduce costs to match fall in license expectations in the quarter. Can you just talk about how you're able to be so nimble on the cost line? And is that just a temporary timing issue and costs will rebuild later in the year? Or are there some structural savings in Q1 that we can extrapolate to the rest of the year?

[Panagiotis Spiliopoulos, executive]

Hi, Charlie. Yes, so I would -- I think it's probably too early and despite the positive evidence we have seen over the last few days to already confirm that we're going to sign up the delta or the missed all in Q2. Clearly, that's our ambition, but we would expect this to happen maybe over rather 2 quarters because you don't know whether there is going to be just days or weeks of delays, but clearly, for the full year, that should be definitely the case again.

So for me to give you now a number on Q2, let's say, a substantial part of the mix will be recovered in Q2 and maybe some in Q3. I think that's the best view today. On costs, yes, they were down 1% year-on-year, but that was driven. If you look at the year ago, delta G&A costs, clearly, there is a structural element in there. Quite clearly, we have reduced internal software costs, optimized our own cloud usage across many applications. The result of some lower services costs, which as we have explained over the last few quarters, is also, call it structural. So we have put the services business on new footing and maintain profitability.

And then the remaining delta is maybe, for 2 reasons, clearly, lower variable cost in terms of commissions, and bonus accruals because we didn't hit the Q1 numbers. So that should clearly revert back if we deliver the numbers on the variable side. And clearly, there was some travel and marketing, which I believe is also more timing related. And ultimately, the last element, which is investments. We haven't changed our investment plans for the full year. So again, some phasing and timing related to this. So I wouldn't -- other than let's say, the G&A and service element, the rest is more timing. So we wouldn't expect a change in terms of the full year cost base would still then maybe up $40 million, $45 million versus last year.

[Charles Brennan, analyst]

And then just lastly, I think we can probably all understand some temporary impacts on the sales cycles. But we don't often see companies impact to this magnitude by external events, whether it's short selling reports or bid talks or any other external influence. Why do you think you've been impacted sort of more than we normally see in these sort of situations?

[Panagiotis Spiliopoulos, executive]

Yes. So number one, we -- again, we serve regulated entities, which have to fulfill a lot of compliant and regulatory restrictions and things like that, obviously, immediately raise a lot of alerts and then people have to react. So this is more from an internal stakeholder perspective. When the CIOs told us, hey, we need to see this risk report for our Board for a risk committee. So it's a lot of internal elements which play to this.

Number two, as you know, we sell them a relatively larger ticket items. So to miss $10 million or $15 million, this is easily -- these are not hundreds of small ticket item deals. It's a few larger ones which get impacted. And immediately, you have a substantial impact. And there were 1, 2 larger deals scheduled to sign in Q1 which populate and which we are confident that they will come pretty soon.

And lastly, it's a small quarter. So any deal slipped or missed has a more pronounced impact also on the back of February, very strong Q1, which shows them in terms of the negative growth rate. If you put $10 million or $15 million into perspective to a full year license number of, let's say, $250 million, yes, it's 5%, 6%, which is not that much and definitely not something you can't recover.

[Andreas Andreades, executive]

Takis, If I could add perhaps a little bit of perspective here. Our clients are buying software from us that are mission-critical. They run the bank's operations on our software, highly strategic. Their are business continuity plans are based on Temenos. And for a bank to say, I'm going to make a 15- or 20-year decision, do I make this on March 31 or do I make it April 15? When I will have the independent report, if you like, out and all our concerns validated, it becomes for boards of banks, which are regulated entities themselves, as Takis said. It becomes a pretty simple decision, they say, okay, 2 weeks. We are still going to make the decision. We still invest. We'll still go ahead. But it's a check in the box that compliance and risk departments and boards, frankly, we're expecting. But in the scheme of things, if you are committing to strategic software for 15 or 20 years, this is how you would be thinking about the decision.

[Operator]

The next question comes from Toby Ogg from JPMorgan.

[Toby Ogg, analyst]

Yes. Perhaps just on the delays on the on-premise side. You mentioned the $10 million to $15 million delta there on the signings that you expect to catch up. Could you quantify or just give us a sense for the magnitude of the amount that's already been signed in Q2? And then what actually gives you the confidence that you will be able to close these deals out.

Then if we move on to the delays on the SaaS side. So generated $5 million of SaaS ACV in the quarter, could you help us again with the magnitude of the delayed ACV on this side, how much you closed out so far and kind of confidence levels around your ability to recoup that over the next few quarters.

[Panagiotis Spiliopoulos, executive]

Okay, Toby. So first of all, on the on-premise or the subscription, we have signed some proportion of that. I'm not going to -- less than 50% of what we have to miss, which has been signed in the first 3 weeks of April. So again, confident that we can catch up this over the next weeks and months, clearly, and that's what we have seen.

Now in terms of -- and that gives you some confidence, clearly, none of the deals which was supposed to sign in Q1 got canceled. So yes, they have been suspended, discussions have resumed, as said, some have signed. But as Andreas has explained, we need to go through this phase in the next few weeks and months. On ACV, clearly, that was disappointing and had a stronger-than-expected impact. We were going for a much higher number and clearly in terms of the ACV number.

And this will -- I think this will come back over the next quarters, but this is clearly going to have a considerable negative impact on sales revenues for the year. So while we have confirmed the full year guidance for our total software licenses, the mix we see now is a bit different than before. So more subscription and less SaaS revenues, ACV being the largest impact. We were going for a much bigger number. And I think this will take -- this will have an impact on the full year number. And clearly, has also being evident in our ARR number we had. Clearly, there was timing of downsell and attrition was earlier than expected, also having a negative impact this quarter.

And ultimately, there was -- we have now better visibility in terms of overages which we see with some customers slowing a bit down. So clearly, that has also a negative impact in terms of our sales revenue growth. So in a nutshell, if you put this all together, the weaker ACV earlier downsell and earlier churn, we now see south growing about 10% this year. We were up 20% before and the delta basically faster or higher growth in terms of subscription.

[Toby Ogg, analyst]

Understood. And then maybe just one follow-up on sort of how we should then think about SaaS kind of revenue growth sort of evolution beyond 2024, if it's sort of trending at a 10% level this year, what then drives the implied sort of acceleration beyond that?

[Panagiotis Spiliopoulos, executive]

Yes. I think you will see, this is what we expected, obviously, a better ACV performance towards the end of the year, which then you should drive ACV -- you should drive sales revenue growth acceleration next year and beyond again. So I think it's probably a bit too early to look at 2025 depending on how we -- how quickly we can deliver this ACV growth we expect but we would expect an acceleration of South revenue growth, in '25 and beyond. So it's really a phasing affecting 2024 and less the outer years.

[Operator]

The next question comes from Laurent Daure from Kepler Cheuvreux.

[Laurent Daure, analyst]

Couple from me as well. The first one is on the support growth of 10%. You gave us the main drivers. And I was wondering into the next quarter, which are the ones that will continue to support or worsen, what shall we expect on this?

My second question is on, back to your previous comment on the SaaS growing only 10% versus 20%. Am I right to understand that it's not coming from the issue you had with the allegation or do you have in your 10% growth for the year, somewhat an impact from that?

And my last question is another way to ask a previous question on the cost base, in the first quarter, if you had $10 million or $50 million more of licenses, what would you have had in terms of cost costs? I'm trying to get what is the impact on the provisioning of bonuses and variable comps?

[Panagiotis Spiliopoulos, executive]

Okay, Laurent. Let me take maintenance first. So maintenance clearly is something we're very happy about. And it's clearly -- it was a clean quarter in terms of evolution. As we said, clearly, subscription deals we signed in the past year, but also this year give us very high quality in terms of uplift. So that's in there. Clearly, also the uplift we generate on renewals, CPI, which have been very adamant in maintaining and ultimately, as we also said, the premium maintenance element. So for this year and also given the visibility we have now on these elements, we would see maintenance growth growing rather 7%, 8% this year from 5% to 6% before. I think that's the right number.

In terms of Q2, specifically, we don't guide on individual quarters, but I think, a similar growth rate as in, I think Q1 or, let's say, plus/minus flat absolute number, Q2 versus Q1 is probably not a bad estimate.

On your second question, yes, the -- well, indirectly, the allegations had an impact in terms of a lot of ACV deals delayed. And as we know, ACV deals have usually even longer sales cycle than straightforward subscription deals. So ACV being pushed out clearly has a negative impact also on Q2. But the main negative impact other than ACV for the full year is clearly the overages, which we see now less and clearly also the timing of downsell and attrition which maybe also a testimony to the still quite tough funding environment for some of the Fintechs out there. This has an impact or not related to the allegations.

And then finally on costs. So if we had delivered as planned or let's say, as per consensus, I think variable costs would be -- probably have been higher, but let's say, $4 million, $5 million. So make it easier if we look at it on a sequential basis, we would see given that we expect a strong recovery of the subscription business, we would see costs sequentially going up, maybe around $10 million or so. So from $157 million plus $10 million. And that's, as we said, across variable costs and clearly and some of the investments, which simply have been faced a bit differently.

[Operator]

The next question comes from Mohammed Moawalla from Goldman Sachs.

[Mohammed Moawalla, analyst]

I have 2 questions. The first one was really for Thibault. Now that the sort of the new CEO is in place, I wonder if you can talk through kind of the agenda and kind of the key priorities that you feel that the new appointee will have. And then secondly, I appreciate that it's been a long wait, and he is starting kind of quite soon, but you're also navigating kind of post the kind of independent third-party review and trying to kind of get this back on track.

And given his kind of background with more of a go-to-market, do you foresee any kind of immediate changes in terms of the organization? And what gives you the confidence that with sort of so many things going on, there won't be any kind of disruption in terms of the kind of execution of the business?

[Thibault de Tersant, executive]

Yes. Thank you, Mo. I think when we were doing this search for CEO, we were actually looking for someone with a lot of strength in go-to-market. And so this is one of our key areas of focus. We believe that the coverage that we have because of the strength of the solutions and products of Temenos is something that is critical in order to accelerate growth. So that is truly one of the important agenda items. It goes with sales coverage, marketing partners and geographic coverage. So all these areas will be important. But it's going to be, of course, a full CEO. So we'll have to truly support and need in all the areas of the business, right? But in terms of priorities, this is really what I would highlight.

[Mohammed Moawalla, analyst]

And what gives you the confidence that...

[Thibault de Tersant, executive]

In terms of management team, frankly, this is not my place to do that. It's going to be Jean-Pierre Brulard's truly task. There is a strong management team at Temenos, people working well together in order to deliver the value to customers. So -- but of course, we will have to step in making his own judgment and get back to you.

[Operator]

The next question comes from Christian Bader from Zürcher Kantonalbank.

[Christian Bader, analyst]

The first one is related to your costs in your reported results, you have recognized a restructuring charge of $5.3 million. I was wondering what is it for? And how much more restructuring do we have to model for the rest of the year, please?

[Panagiotis Spiliopoulos, executive]

Yes. I'll take this one, yes. So $5.3 million, which we have in terms of restructuring. There is an element of improvement in terms of our footprint for leases and rents and these type of things. So office footprint optimization. That's one element in there. And clearly, we are always optimizing in certain areas, what we can do in terms of the mix, externals versus internals. The considerable part in there is clearly, we have a considerable element in there in terms of the costs for this third-party examination, which was or is quite costly.

And if you look at the restructuring cost guidance, which we have increased from $12 million to $22 million, and this is largely driven by the costs related to this third-party examination. And then this is not just for the lawyers and forensic investigators. This is also additional audit costs and costs related to that.

The restructuring costs we gave you in February, the $12 million for the underlying business where we always have some areas to optimize in terms of also the regional footprint, as I mentioned, that has been unchanged.

[Christian Bader, analyst]

Okay. That's very clear. And just for me to understand, I mean, when I look back over the last couple of years, you always have restructuring charges. So I'm kind of wondering, why do you strip those out, I mean, those seem to be part of the business. So why is it nonrecurring?

[Panagiotis Spiliopoulos, executive]

Well, you don't know, it's $12 million. And I think there is for a business of our size at $1 billion revenues to have 1% -- sorry, to have 0.1% in terms of the revenues, in terms of cost to optimize, I think that's fair if you want 3% to 4% of EBIT, yes. I think this is -- there is always something to do in a large global organization. And it's not like, is it recurring? I mean, it's a budget we define at the start of the year because we know there could be something coming, but there are sometimes unforeseen elements, something like the pandemic back in 2020 or when we faced the issues in 2022 with our services organization which will come forecast or now these allegations, yes. So it's a budget we have in there, some it's not predictable from our perspective, it's one-off, and this is why we put it in there.

[Operator]

The next question comes from Chandra Sriram from Stifel.

[Chandramouli Sriraman, analyst]

Just a couple. So I see that you mentioned that your expectation of SaaS growth is now 10%. That's about a 20% drop in terms -- $20 million drop TSL whereas the range of your TSL growth is still in the low teens. So what gives you the confidence that you can still compensate for this drop in SaaS revenues. And just if you can provide any kind of detailed color in terms of any subsegments which are particularly weak, that would be super helpful.

[Panagiotis Spiliopoulos, executive]

Yes, as you correctly figured out, this is about a $20 million drop in terms of SaaS revenues. What I mentioned before is about half of that is coming just from the ACV impact. If you sign $5 million versus a much higher number which we had budgeted for, that's already half the drop explained. And then the rest is really the timing of some of the downsell, which came earlier than expected, which then also falls through and ultimately also some of the visibility on overages where we see where we had benefited last year, and it looks like some of those clients either will do less or later in terms of overages this year.

Now what gives us the visibility of the confidence, I think the $20 million given we started also with a prudent guidance in February. Clearly, we have a very good pipeline and given the evolution, we can still see that we can find those $20 million less SaaS revenues, we'll find them in terms of subscription deals. And this is why we maintain the guidance. So it's offsetting SaaS with subscription for this year.

[Chandramouli Sriraman, analyst]

Maybe a quick follow-up. Services margins, you seem to have now down the green. Is this sustainable? Or is this a one-off quarter?

[Panagiotis Spiliopoulos, executive]

No. I think the services margin is, as we mentioned last year or in February already, we would see the services margin continue to evolve positively this year. And we said we plan to go eventually to high single-digit, low double digits. Again, this will not happen this year, but clearly, we will make a sizable step forward. This year already from 2% to a couple of percentage points upwards. There were no one-offs in Q1. Now while we're always going to have the same margin every single quarter, probably not depends on the individual projects, finishing and going live, but clearly we'll remain profitable in every quarter this year and also with resuming service revenue growth that should also help.

Maybe to be clear, on the previous one, why are we so confident on the TSL number, ultimately, both subscription and SaaS, and as we have seen maintenance, they drive ARR yet. So for us and for the sales force, being tuned on ARR. And clearly, they have the ambition to deliver on this KPI again. If we have these delays on the ACV side, we're going to try to make it up for with -- subscription. And clearly, maintenance is clearly a highlight as we have shown which in terms of profitability helps a lot on the EBIT line.

[Operator]

The last question for today's call comes from Michael Foeth from Vontobel.

[Michael Foeth, analyst]

Just 2 for me. Can you repeat what the cost for the examination -- the independent report were and if they've all been provisioned for in the first quarter or if there is more to come, I'm not sure as you said it.

And then a question probably for Thibault is whether the CEO signing was at all impacted by the independent report. And given that he's now starting in a week already, is there a period during which Andreas will stay on board for the transition?

[Panagiotis Spiliopoulos, executive]

Okay. Let me take the first one and then Thibault, the second. So Michael, we don't have yet the full visibility. As you know, they just finished 1 week ago. We haven't received all the invoices yet. We have provisioned one part of what we have received basically in terms of -- for Q1, but there will be a considerable amount coming also in Q2. We don't know the exact number, but we have increased restructuring from $12 million to $22 million. So being on the conservative side, something mid- to high single digit is probably a fair estimate.

[Thibault de Tersant, executive]

And so the CEO signing actually was not stopped by Hindenburg. Of course, a new candidate was interested in findings by the examiners independent third parties during the examination. But at the same time, I have been, for many years, on the Temenos Board and the Chair of the Audit Committee for many years. And so I was able to communicate confidence that the result of examination would be positive and was believed by the candidate.

So -- and the transition, Andreas will do a transition during month of May and then he has a 12-month notice. So we'll be able also to give advice to the new CEO as needed during this period of time.

[Operator]

Gentlemen, over to you for closing remarks.

[Panagiotis Spiliopoulos, executive]

Well, thank you for participating to this call. And we look forward, of course, to meeting with you shortly. Have a good day.

[Adam Snyder, executive]

Thank you very much.

[Operator]

This conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may disconnect your lines. Goodbye.